Contractor/ Investor partner up

6 Replies

Hello

I am a contractor who does 10-12 remodel flips a year with two different investors in the Milwaukee, Wi area and I have an opportunity in doing work for a new investor. In doing business with the two original investors I provide scope of work and a contract is signed, its a well oiled machine thus far:)  But with the new investor it'll be a little different....

I GC the entire flip and get my draws for labor/ materials accordingly. The investor will have no time to take part in any of the remodel and minimal time in marketing the completed homes, although he has used used an agent in the past to find and sell properties. Essentially, I provide market ready homes and and he provides the cash needed.  

I will still provide scope of work and etc. but I will also be GCing the entire project. 

 What is the appropriate way of doing business with him?

Should there be talks of commissions made per sold homes?

Should I set up a split of profits agreement? 

What are my avenues? Etc....

There is a great opportunity here for me and my business of being the contractor, and I also see this as my way in to becoming my own Investor! :)

Thanks for reading this and look forward to reading the responses! 

Hi Jason,

Just a few quick thoughts, having played both the role of the guy doing the work or getting the work done as well as the investor looking for a GC who could handle everything for a price where it is both reasonable for me as well as worth the GC's time, I know this situation fairly well, but again these are just a few quick thoughts off of the top of my head. 

-Obviously, many investors would probably LOVE for you to do a profit sharing arrangement where if you don't get it done for the right amount of money, or if the quality of the work isn't up to par and in the end it doesn't make much profit, you eat that as well. Yet, even an accepted offer is never final, so profits can not be figured until closing, which is normally at least 2 months after your work is complete, as most conventional loans take 6 to 8 weeks to close and houses are usually on the market for a while. Now, unless you're rollin in dough, (in which case you'd probably also be the investor!) you want to get some of that pay long before closing and as you mentioned, draws are the common method in most construction jobs. In that case, maybe you can work out some sort of equitable split where you're making enough to cover what you need to make and keep yourself afloat, but also show the investor that you're willing to shoulder some risk as well. 

-Also, this investor ought to be able to sell him/her self to you as well. Have they done this before? Can they stomach laying out whatever sum of money it will be, knowing that even when complete it could still take a while to sell and then longer to close and they don't get a cent until closing day! Its easy to say they can handle anything on day 1 or before day 1, but its a whole different story down the road a bit, especially if any delays pop up, which are common when rehabbing. 

-Last thought right now is, rehabbing and flipping a home is a FAR different biz from 10 or even 5 years ago. I got into this part time around 2004 and back then I'd heard from a bunch of guys who'd flipped houses that basically, "you can pull permits if you want to and in some suburbs you probably should but as long as the inspector doesn't find out, its no big deal" and they were probably right, for the most part. 

Now, I think not pulling permits is insane! Besides the city, the buyer's lender will certainly have it appraised and the appraiser will certainly mention the fresh rehab and chances are pretty good that the lender will ask if permits were pulled or not and if not, they might back out. Also, being the listing realtor as well, most realtors and many buyers are now savvy to the flip biz and know that along with the people honestly trying to produce a quality product, there were also a lot of clowns out there who sold rehabs that were simply junk and they'll want to know about permits as well. This is something both you and the investor should be on the same page about, because here in WI, legally ONLY a licensed master plumber or electrician can do anything but the most basic of work and can pull a permit for work. Permits add expense and time to a project, often hassle as well, but without them you're also taking on MASSIVE liability too. Anyone who insists on a non-licensed person doing some wiring or whatever that should have a permit (even though its admittedly not that hard to do correctly) is asking for trouble!

Originally posted by @Jason Anderson :

I GC the entire flip and get my draws for labor/ materials accordingly. The investor will have no time to take part in any of the remodel and minimal time in marketing the completed homes, although he has used used an agent in the past to find and sell properties. Essentially, I provide market ready homes and and he provides the cash needed. 

I will still provide scope of work and etc. but I will also be GCing the entire project. 

Should there be talks of commissions made per sold homes?

 I don't understand. Were you not GCing entire projects before? By GCing, do you mean that he also expects you to handle advertising, marketing, and the sale of the property?

As a contractor and an investor, I pretty strongly recommend against any contract that allows the investor to see your labor and material charges separately. It opens the door for the investor to start picking apart invoices, "Why 100 studs and not 99... Couldn't your carpenters have worked faster... they took too many breaks... I'm not paying for non-optimized labor... why do I have to pay for a case of water, refreshments are not a valid cost... your portapotty cost too much and isn't necessary, when I lived in Burma we just went in the bushes" (All objections I've heard when trying to do things that way)

Your current business models sounds like you're providing set-cost projects. Ask yourself if a new customer is really worth breaking a working business model!

Last point - profit splits are a bad idea, for all the reasons that @Robert Taylor pointed out. As an investor, I would NEVER agree to a profit split on a project that I didn't have recorded equitable interest in (My name needs to be on a deed somewhere), nor would I want a profit split on a project that I didn't have control over the purchase of. 

As a contractor I would NEVER agree to a profit split situation without (you guessed it) my name on a deed somewhere, and I would NEVER agree to a profit split because... one hat or the other! If I wanted to work for free (or monetary break-even) and cross my fingers on the house sale being profitable in order for me to get make a profit, I have WAY, WAY better ways to do that. (Like Vegas.)

One of the best parts, IMO, of being a contractor is that unless something goes really wrong your profit is basically guaranteed, and it happens the day you start a project.... not months after you get done with one. 

By agreeing to a profit split with an investor, you lose most of the control over your ability to make a profit. What I mean by that is...

* In real estate, the purchase of a property is a major control over whether or not you make money. A contractor with a profit split typically has no control over the purchase of a property and therefore loses that [major] element of control.

* In real estate, the renovation is a huge cost driver. You may get control over this, but it's only a part of the equation.

* Finally, you probably won't have control over the sale of the property. You can't haggle, you can't negotiate, because you're not on the deed.

TL;DR - It's a bad idea.

Friend, you fix the house and get pay for it. If this relationship gets too complicated you might have a big problem to get your money. keep is separate and clean. You want to do a deal. do it on your own. don't get to tangled up on business relationships like this. 

You can not get a commission because you don't have a R.E. License.

My advise work hard as you do to earn your money and go over and beyond. What will happen if you say, we are partners and something happen to the house and he says "you are my partner we are into this deal together...." You think this things don't happen... believe me I had 45 people working for me.

If you still insist get an attorney to draw up the agreement, so you both understand what each persons obligation is.

Yeah, Ill probably be rethinking this through:)  Thanks for the responses and youve all made some good points,  I think Ill be keeping it simple with this one. 

Just curious from an investor perspective....how would you structure a deal with an investor if they merely provided the cash and the GC did almost everything else???  I am in a position where I can provide cash but because I am not local I cant really do any of the work except have my realtor help with purchase, marketing, and sale.

@ Bryan C. It would be a tough sell if you your implying your trying to flip from a far. Your basically giving away some of your profit to incentivize a contractor to do a better or quicker job by cutting them into the back end payday. Is it worth it to give up your profit just to pay them to do their job? Possibly being a hard money lender with a % for you on the back end based on the profit might work?

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